For years, retailers have looked upon Starbucks' mobile payment app — which is used for more than a fifth of its U.S. in-store payments — with envy. But lately, stores are realizing that they don't want to duplicate Starbucks' success.
At the core of Starbucks' mobile payment app is the Starbucks reloadable gift card, and the app streamlines the processes of reloading and checking balances. However, many retail stores prefer to drive spending to private-label credit cards, which get different benefits from a mobile app.
"Everyone says Starbucks is different, but every retailer strives to have the majority of their sales on their private label card," said Richard Crone, chief executive of San Carlos, Calif.-based payments consulting firm Crone Consulting LLC.
"Now they are starting to wake up and are seeing they can provide a whole suite of services around this mobile wallet," Crone said. "They can eventually get to where a customer could open a private label credit card account in the privacy of their own home through the app."
Kohl's in particular is demonstrating the wisdom of building a mobile app to suit its own needs. With Kohl's Pay introducing the option for users to redeem various Kohl's rewards at the time of transaction, through a simple QR code scan, the process "is so easy it is as close to Uber as a retailer can get," Crone said.
Many retailers didn't make the move in the past to push their private label cards more aggressively or establish them as the brand in a mobile wallet because their back-end providers didn't support mobile, Crone said.
When the Merchant Customer Exchange initiative to create the CurrentC mobile wallet fell apart, the major retailers who were MCX members had learned enough to venture out on their own with branded wallet apps and hook up with providers also on board with mobile, Crone added.
Private label cards are already a sound economic move for retailers. Depending on how their contracts are set up with private label issuers and processors, the retailers promoting private label cards for transaction volume make money on each of those transactions, as opposed to paying interchange for sales on open-loop network cards.
Essentially, the private label providers pay the retailers, instead of vice versa.
"I don't know if it is interchange as we know it," said Brian Riley, director of credit advisory services for Mercator Advisory Group. "The average interest rate on those transactions is pretty high, so if it is not really interchange, I would call it more of a rebate or a participation benefit."
Major retailers did not respond to inquiries about their current transaction contracts, but one did confirm a provider generally pays the retailer low to mid-single digit percentages on a transaction, while the retailer also is not paying a 1% to 2.5% interchange fee to a card network. That math adds up well for retailers.
The major private label providers striking these deals and offering incentives include Synchrony Financial, Alliance Data, Capital One Private Label, Citi Retail Services, Wells Fargo Retail Services, and others. Those providers make their money off the receivables from the card accounts, as most retailers don't hold onto their own receivables.
"It's a new era and, quite frankly, a healthy one if you are a bigger retailer," said Steve Mott, principal of BetterBuyDesign, a Stamford, Conn.-based consulting firm. "If you are a smaller retailer, interchange keeps going up, but that's the name of the game in a free-market, capitalist system."
Co-branded credit cards represent about 30% of total card payments, while private label cards hover around 10% of the payments card business, Mott said.
"The big incentive on private label cards used in a store is that processing costs are less than a nickel a transaction," Mott added. "A private label card is rarely used outside of the store, but it does happen."
One of the deficiencies of Apple Pay when it first came into the market was its inability to support a private label card, Mott said. "A retailer who has a private label card is getting more than 50% of its business on that card, so it is kind of silly to participate in Apple Pay if you can't get it to most of your customers," he added.
Synchrony Financial has partnered with retailers to integrate into their native apps, in the same manner it did with e-commerce and mobile web, said Whit Goodrich, Synchrony Financial senior vice president and retail card chief marketing officer.
"This is a clear overlap of a retailer's most loyal customer base in those that have downloaded the native app and also those that have a retailer branded credit card," Goodrich said. Those cards could be a private label card or Synchrony's Dual Card, used as a private label card that can also be used for transactions outside of the store.
As more private label cards become available and retailers catch on to the incentive programs offered through providers, bank-branded wallets may also find their spot right alongside the Kohl's and Walmart Pays of the world, Mercator's Riley said.
This is especially true of Chase Pay, which is expected to be available late this year or early next year, and already has various retailers signed on for support. For consumers, Chase Pay will operate nearly identical to Kohl's, Walmart, Dunkin' Donuts and Subway wallets through their use of QR-code technology. The third-party wallet providers like Apple, Android and Samsung operate on Near Field Communication technology, calling for retailers add those NFC readers to their terminals.
With their own mobile wallet venture out of the picture, most MCX members are turning to their own apps and have also cozied up to Chase Pay, considering the low fees it had offered the retailers to support the technology.
If a retailer can obtain the private label benefits of avoiding interchange through its branded wallet, plus accept Chase Pay with its promise of lower fees, their transaction costs will become substantially lower.
"A real sweet spot for Chase Pay will be when a Chase customer is going into Walmart," Riley said. "That's a pretty good combination for the retailer to get, and the advantage for Chase Pay is that it would have a much wider footprint over the others."